Highwoods Properties Inc (HIW) 2011 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Highwoods Properties conference call. (Operator Instructions). As a reminder this conference is being recorded today, Wednesday, February 8, 2012. I would now like to turn the conference over to Tabitha Zane. Please go ahead, ma'am.

Thank you and good morning. On the call today are Ed Fritsch, President and Chief Executive Officer, Mike Harris, Chief Operating Officer and Terry Stevens, Chief Financial Officer. If anyone has not received a copy of yesterday's press release or the supplemental, please visit our website at www.highwoods.comor call 919-431-1529 and we will email copies to you. Please note, in yesterday's press release we have announced the planned dates for our remaining 2012 financial releases and conference calls. Also, following the conclusion of today's conference call, we will put a Senior Management's Formal Remarks on the Investor Relations section of our website, under the presentation section.

Before we begin, I would like to remind you that this call will include forward-looking statements concerning the Company's operations and financial condition. Including estimates and effects of asset dispositions and acquisitions, the cost and timing of development projects, the terms and timing of anticipated financings, joint ventures, rollover rents, occupancy, revenue and expense trends and so forth. Such statementsare subject to various risks and uncertainties. Actual results could materially differ from those currently anticipated due to a number of factors. Including those identified at the bottom of yesterday's release, and those identified in the Company's 2011 Annual Report on Form 10-K.

The Company assumes no obligation to update or supplement forward-looking statements that become untrue because of subsequent events. During this call we will also discuss non GAAP financial measures, such as FFO and NOI. Definitions of FFO and NOI and an explanation of management's view of the usefulness and risks of FFO and NOI, can be found towards the bottom of yesterday's release, and are also available on the Investor Relations section of the web at Highwoods.com. I will now turn Ed Fritsch.

Good morning everyone. The overriding theme of uncertainty from 2011 seems destined to carryover into 2012. However, some arenas are showing signs of modest improvement. While everyone is grossly aware of the ongoing economic woes with stuff like unemployment, [ginormous] Federal debt, convulsions in Europe, a totally dysfunctional tax code, Pandora's healthcare box and regulations heaped upon rent regulations. Those woes are being somewhat moderated by some happier stuff like last Friday's job report, expected sustained low interest rates, higher personal income, at least for the employed, the stock market's recent bull run and 346 days until January 20th, 2013, but who's counting. Hopefully, time is slowly but absolutely becoming an ally, good will once again outweigh bad and certainty will overcome uncertainty. Given all this, here's where we stand.

We remain committed to our strategic plan to build long-term shareholder value. This includes continuously improving our portfolio, staying committed to low leverage, investing in our people, being the landlord of choice, delivering knock-your-socks-off customer service, tenaciously seeking acquisitions and tirelessly pursuing development opportunities. In 2011, we continued to make good progress and delivered full year FFO of $2.58 per share, $0.05 above the midpoint before including the contributions of PPG Place and Riverwood 100. During the year we leased 4.3 million square feet of office,a 19% increase over 2010, and our weighted average office lease term was 5.6 years. The highest since our IPO.

As you know, we [accreatively] deployed $309 million of capital, including our entry into Pittsburgh. Speaking of Pittsburgh, a number of you kindly attended our December PPG Place property tour, and we hope you now have a better under standing the market and our investment there. For those of you who were unable to attend, we would welcome giving you a tour at any time, at your convenience. We also announced $72 million of development which included, $48.4 million build-to-suit development in Nashville.

We are developing a seven-story, 203,000 square foot headquarters for LifePoint Hospitals and a 25,000 square feet of immediately adjacent freestanding spec-ammenity retail. The site is located on Company-owned land in Brentwood, a vibrant submarket that was only 6% vacant at year end. This development has a projected cash return of 9.5% and is a vivid example of our competitive advantage of owning key tracts of land in strong submarkets. 2011 development also included a non-core land sale, disguised as a development project. We contributed a 15-acre non-core tract valued at $2.4 million to a 50/50 JV with Northwood Raven, a multi-family development firm. The JV will develop a $25.8 million 215 unit apartment complex in Cary, North Carolina.

We remain focused on identifying avenues where we can maximize the value of our non-core land, and we believe this JV opportunity has the potential to generate a higher return than if we had sold the land out right. From a financing perspective, we obtained a new $475 million line of credit and closed two term loans totaling $425 million,all at favorable rates. In addition, we paid off $184 million, 7% secured loan.

2011, of course, wasn't challenge-free. While better than 2010, cash rent growth for leases signed during the year was negative and lease concessions remained common. Also, we're optimistic that more users would have pulled the trigger on build-to-suits, and we had hoped to get more non-core dispositions out the door. For 2012 we are projecting FFO of $2.56 to $2.76 per share, which represents 3% growth at the mid point and includes $0.08 to $0.12 of anticipated dilution, from potential dispositions and equity issuance.

On the acquisitions front, our discipline strategy has worked well to date. We continue to seek properties and infill submarkets that enhance the overall quality of our portfolio and are right priced, relative to the assets risk profile and our cost of capital. We predict closing on $100 million to $300 million of acquisitions in 2012. Some build-to-suitdevelopment discussions are active, but customer decision making remains protracted and is difficult to know which discussions, if any, will result in a ground-breaking ceremony. We are predicting starting $50 million to $150 million of development this year. Our 2012 guidance includes $100 million to $150 million of non-core dispositions.

We continue to [co-properties] out our portfolio that longer fit our investment criteria due to concerns about market, age, location, quality and/or functionality. Like every year blocking/tackling is job one. In addition, in 2012 we will continue to focus on improving our portfolio, grabbing more market share and mining opportunities where we can [accreatively] deploy capital to grow our business.

Finally, we are pleased to welcome Mark Mulhern to our Board of Directors. Mark is the CFO of Progress Energy, a fortune 250 Utility with $10 billion in annual revenues. He obviously has an extensive financial background and deep experience in capital intensive industry. Our Board and our Senior Leadership Team, look forward to working with Mark and his active participation. I will now turn the call over to Mike.,

Thanks, Ed. Good morning, everyone. As Ed noted, 2011 was a year of strong leasing volume and longer terms. Looking at the fourth quarter, occupancy in our wholly-owned portfolio increased 70 basis from the third quarter, to end the year at 90%. Office occupancy at year-end was 89.2%, up 50 basis points from the third quarter. As it has been for the past seven years, occupancy in our office portfolio remains considerably higher than the overall market's occupancy in each of our core markets. In our top five markets we are outperforming the market by an average of 780 basis points. Absorption in our in our top five markets combined was positive every quarter in 2011 totaling 1.6 million square feet for the year. It was the first time we have had four consecutive quarters of positive net absorption since 2007. Every one of our markets also reported office job growth in the fourth quarter.

Weighted average lease term in the fourth quarter for office leases signed was 6.8 years, and CapEx related to office leasing was $16.04 per square foot. Both metrics were heavily impacted by two large office deals. A fifteen year, 181,000 square foot lease renewal and expansion with Lockton in Kansas City, and a ten year, 105,000 square foot renewal with Dickie McCamey in Pittsburgh. These two deals combined will generate a total of $108 million of term rent. Without these two deals in the mix, the weighted average lease term in the fourth quarter would have been 4.7 years, and CapEx related to office leasing would have been $12.92 per square foot below our five quarter average.

Looking at the full year, net effective rents for office leases signed in 2011 averaged $11.50 per square foot, excuse me, $11.57 per square foot, a 14% increase from 2010. While cash rents for office leases signed this year declined on average 8.3%, we continue to secure annual rent escalations of between 2% and 3% for the vast majority of leases signed, as evidenced by GAAP rent which increased a healthy 2.6% in 2011 for office leases signed. Also, on an annual basis office TIs and leasing commissions per year of term, dropped 8.5% from 2010.

Turning to the Kansas City and Pittsburgh deals I mentioned earlier, Lockton has extended it its lease into 2030 and expanded by 10,000 square feet at Valencia Place Office Tower on the Country Club Plaza. The firm now leases 181,000 square feet, 72% of this building. We were pleased to renew a 105,000 square foot lease with Dickie McCamey, securing them in 2 PPG Place into 2025. Since our acquisition of PPG Place last September, occupancy has increased 110 basis points.

Looking at a few of our other top office markets, our Nashville portfolio is performing well. Ending the year with 94.1% occupancy, a 160 basis point increase from the third quarter and a 420 basis point increase from year end 2010. Our Nashville team continues to do a stellar job retaining and growing our customer base. Our Atlanta division had a good year as well, leasing 560,000 square feet of office space. More than double the amount of office space we leased in 2010. We are keenly focused on backfilling the space AT&T is vacating at 2800 Century Center. As a reminder, we have already signed leases for 70,000 square feet of this space which AT&T vacated at year end, so re-tenanting work could begin.

Our Atlanta team is working with several prospects to backfill a portion of the 151,000 square feet that AT&T is vacating on June 30. The Atlanta team has also done an impressive job Highwood-tising Riverwood 100. We recently signed a 25,000 square foot expansion with Aon Hewitt, which now leases a total of 167,000 square feet through 2019.

The Tampa market, while still a challenge, remains a solid performer for our Company. Occupancy in our Tampa portfolio was 90.2% at year end, up 20 basis points year-over-year, and 90 basis points from the third quarter. Our leasing team is now actively marketing the 319,000 square feet in Tampa Bay Park, in the Westshore submarket, that PWC will be vacating in the second quarter of 2013. Prospects and showings are increasing, and last weak Time Warner signed a lease for 23,000 square feet.

Large blocks of Class A space in Westshore are scarce, and with no supply on the horizon we have a distinct advantage in attracting larger users in the market. All-in-all leasing volume in 2011 was very strong and terms were stable, but concessions remained in some aspect of most deals. Market fundamentals in terms of employment growth and absorption are trending positive and we hope this pertains well for 2012. Terry.

Thanks, Mike and good morning. We were pleased with our financial and operating results for the fourth quarter and full year. The $0.70 of FFO per share this quarter, was $0.07 better on a net basis than the fourth quarter of 2010, primarily due to $0.06 from acquisitionsand development projects. Mainly our September acquisitions in Pittsburgh and Atlanta, and the April acquisition of a medical office building in Raleigh, $0.03 from the early pay off on October 3, of $184 million, 7% secured loan, $0.01 from the June redemption of aremaining Series B preferred stock and $0.01 in lower G&A. These were partially offset by a $0.005 effect from higher shares outstanding, $0.005 from the third quarter of 2011 dispositions and about $0.025 in lower same-property GAAP NOI.

This same-property decline was largely due to fourth quarter 2010 CAM income accruals being too high, which you may, recall we adjusted during our annual CAM true-up process in first quarter of 2011. Fourth quarter 2010 also had lower than normal bad debts, utility expenses and real estate taxes. The latter from prior period tax appeal wins. Full year FFO was $2.58 per share, up $0.12 on a net basis over 2010, primarily due to $0.12 from acquisitions and development projects, $0.02 in lower interest expense, mostly from paying offer the $184 million secured loan that I referenced earlier, offset by lower capitalized interest, $0.03 from a merchant build gain in the third quarter, $0.02 in lower preferred stock dividends and $0.015 in lower G&A, excluding property acquisition costs.

These were partly offset by $0.03 in lower same-property GAAP NOI mostly caused by the same factors that impacted the fourth quarter, $0.03 from the impact of dispositions in 2010 and 2011, including the second quarter 2010 sale of our interest in the Des Moines joint ventures and $0.02 from higher shares outstanding. Sequentially fourth quarter FFO was $0.05 higher on a net basis in the third quarter. Primarily due to $0.04 in FFOfrom the September acquisitions, $0.03 from lower interest on the secured loan pay off and $0.01 in higher dead deal costs in third quarter. These positive effects on the sequential results were partly offset by the $0.03 merchant build gain in the third quarter.

Turning to the balance sheet, we had a productive year in extending our maturities by adding a five-year term loan in February and a seven-year term loan that closed just after year end. By recasting our credit facility in late July for four years, plus a one year extension option and at lower cost, and paying off early the $184 million loan. These transactions also lowered the weighted average rate on its outstanding debt from 5.74% to 4.97%, a 77 basis point reduction in one year. The 4.97% rate reflects the new seven-yearterm loan which we closed on January 11, and swapped to a fixed rate of 3.58%.

Given that we, in effect, fixed the rate on the new term loan, we now have $389 million of floating rate debt or only 20% of total debt. We currently have $343 million of availability on our revolving credit facility, not counting the $75 million accordion and we only have $73 million of debt maturing this year, all in the fourth quarter. With respect to CAD, we did end up $6 million negative for the full year. Primarily due to leasing CapEx associated with the long-term Lockton and Dickie McCamey fourth quarter renewals that Mike referenced, and the timing of other TIs and building improvements that were incurred in the fourth quarter.

We do expect to recover about $3 million of fourth quarter leasing CapEx from the planned sale of two non-core assets in Orlando, we referenced last quarter. We currently expect 2012 to be CAD neutral to slightly positive. We issued 2012 FFO guidance of $2.56 to $2.76 per share and the key underlying assumptions. Same-property cash NOI growth is expected to be positive, given that much of the 2011 same-property straight-line rent will turn into cash rent in 2012. As in the past, our guidance assumes no impact for potential acquisitions, but this year we did include $0.08 to $0.12 anticipated dilution from projected non-core dispositions and equity issuances. Operator we are now ready for questions.

Thank you. (Operator Instructions). One moment, please for the first question. Our first question comes from the line of Jamie Feldman of BofA Merrill Lynch. Please proceed with your question.

Thank you. I was hoping you could talk a little bit more about where you think we are in the recovery or stabilization across your markets. You know, if you think about your largest markets in terms of the sectors that are driving growth, which ones are recovering faster, which ones you think have the best outlook over the next 12 or 24 months and why?

Sure Jaimie. Good morning. Just broadly from a holistic perspective, we conduct a pretty thorough evaluation of where markets are and where the economy is. The report that our analysts in-house generated for this quarter, the headline they put on it was, Best Report Since 2007. Again, speaking broadly, we show that we had all of our markets gained jobs, all of our markets were better this quarter than last quarter. It was four consecutive quarters that we had positive absorption on average in our top five markets, and it was a quarter that showed the most robust employment growth going forward based upon Reece's forecast. Specifically with regard to various industries, what we have seen the growth more in has been clinical research, energy, engineering, financial services, healthcare and technology. The contractions continue to be on the homebuilding side and anything related to that, advertising, PR marketing type firms.

Okay. Can you talk a little bit about your assumptions for cap rates or yields on either the developments, sales and dispositions, I'm sorry, dispositions and acquisitions?

Sure. We don't see much change in that and as we've mentioned in prior quarters, it's really a tale of two cities. Where the institutional quality trophy assets that are relatively well stabilized are garnering very attractive cap rates, low sevens to mid sixes, and then the real non-core assets that have occupancy issues as well as functionality issues, are really suffering with being unable to get out of the door at decent cap rates.

Okay. Alright. Thank you.

Thank you, Jaimie.

Our next question comes from the line of Chris Caton from Morgan Stanley. Please proceed with your question.

Thanks, good morning. Maybe could you follow up on that? Could you take a little bit about which strategies you're interested in in terms of your acquisition guidance, what type of assets you're looking at and how those are surfacing?

Sure. I think that what we accomplished in 2011 may, Chris, be the answer to your question. We feel like our investment for example, in Pittsburgh that, this is a self serving comment, but I think that we were successful in hitting them were they ain't. In that we are able to acquire a true institutional quality crown jewel asset well below replacement costs with upside in it and at a very attractive price. We have projected cash yields in the nines and GAAP in the tens, and we bought it 10 percentage below what the average occupancy is for Class A assets in that market.

In Riverwood. that we also closed on in September this past year. the occupancy when we bought it was 87%. We expect to be able to push that occupancy five or six percentage points. We have some good things working already now, so that was an opportunity, again, buy an asset that was well below replacement costs. Maybe on the other end of the spectrum, we bought Independence Park in Florida in December of 2010, and by third quarter of 2011 we had it a 100% leased. It was a building that was a 100% vacant at purchase, but we think that we moderated our risk in that it was only 116,000 square foot building.

We do have, as we've also discussed in the past, what we call a wish list, that are driven by each division. So each one of our very capable division heads has a specific wish list of assets that they would like to own in their existing markets, that they are pursuing. Some of them, if they trade for example like the SunTrust tower in downtown Orlando, trade at a number well beyond how we underwrote it or what we think is the appropriate risk profile, we will pass on. We will stick to our mantra of being patient and deliberate, but if we have an opportunity to acquire like we did PPG Place or Riverwood 100, we're seizing those and we're chasing as much that's off market that's on market.

Great.

How's that for a long answer?

That's very detailed. I appreciate it. It sounds like both kind of value-added and stabilized are maybe leaning more towards stabilized and then -- I'm sorry. Did you want to --

Well, I just think on that, Chris, like PPG Place is probably a [tweener] in that barbell that you just outlined. So at 81.2 % at purchase, it's not all value-add, but there is a significant component of value-add, but I think that we mitigated a huge downside risk in that it wasn't like SunTrust, that's only 70% leased. It was 81% leased.

Thanks and then just on PPG Place, with the leasing program clearly underway, can you talk a little bit about how rents are meeting with your initial expectations and how occupancy and take up are meeting with your initial expectations?

Sure. We had said in the past I think on the October call that we expected -- maybe it was the September call, 3% to 5% rent growth after the first year and that we expected to achieve 91.5% leased at stabilization in 2014. Mike talked at length on the last call about the DCK lease, which we did within the first month of acquisition. We also disclosed the Dickie McCamey renewal which didn't add occupancy, but certainly solidified a core 100,000 square foot customer in 2 PPG Place, for an extended period of time under some attractive terms. So we've got a number of things working and we remain very comfortable with what we had forecasted with regard to the 9% cash, mid-tens GAAP and 91.5% by 2014.

Chris, this is Mike. As we discussed earlier, the CBD Pittsburgh market particularly in the Class A space, continues to be tight. Single-digit vacancies, so with our vacancy in PBG Place we believe we're still sitting somewhat in the cat bird seat to take advantage of larger deals that are out there right now.

We have done some things, Chris, that we think will help generate additional interest in the assets. In that we're redoing some of the common areas, and some of the spaces that were vacant and were long-term vacant. We've gone in and gutted, and made them much more presentable for the leasing people to show.

And I'm up there a fair amount, Chris, I'm up there almost every other week and had an opportunity to meet some of our customers. We're getting good kudos for the things that we have done. The customers like it. They have seen a difference and we believe that will pay us good dividends as the word spreads around Pittsburgh that Highwoods is a player in that market.

Thank you, guys.

Thanks, Chris.

Our next question comes from the line of Brendan Maiorana of Wells Fargo. Please proceed with your question.

Thanks, goods morning, guys. I just wanted to start with guidance a little bit and drill down on some of the assumptions. If I look at -- you don't include the acquisition disposition in the capital recycling activity in the numbers, but you do have the dilution from an anticipated equity issuance. If I look at acquisition guidance and disposition guidance, it's still up on a net basis by $75 million and thinking back to your comments after the PPG acquisition in Riverwood 100, you wanted to keep leverage neutral after that. Does your equity issuance outlook include increasing your net investment activity in 2012, plus the net investment activity that you did in 2011?

Yes. Great -- question, Brendan. So your dead on right about what we said after the September 16 call when we closed on both Riverwood and PPG on the same day, that we want to stay leverage neutral. We have said in our strategic plan and we started this back in '05, we said that we really red lined at 50% and we defined dead as debt plus preferred as a percent of total assets. We have said we were well above 50% in the Company's history. It's our goal to not touch that third rail again, so 50% is red line bright mark for us. What we've also said is that we would like to operate within the band of 42% to 48th% of that same metric, debt plus preferred as a percent of total assets.

We'll flow in between the 42% and 48%, depending on the timing of dispositions, the timing of acquisitions, paying -- pay applications for development projects. At the end of the second quarter of 2011, preacquisition in Atlanta and Pittsburgh, that metric was right around 44%. Post closing, that metric moved up to like 47%. So the numbers that we show in our guidance, the $0.08 to $0.12 is what will get us back to the pre-deployment of capital for those acquisitions back in the 44% range. As we are able to attract more build-to-suit development and more acquisitions, that will be additive to the numbers that we provided.

Okay. Got it. Okay. Great. With respect to guidance, is that an apples-to-apples comparison on your occupancy outlook with -- to end the year at the mid point of the expectations, call it 90.5%, does that compare apples-to-apples to 90.0% at the end of the 2011, up 50 basis points at the mid point?

That's correct, because it doesn't assume any acquisitions in it and the only thing that would impact that because the development of life point that won't deliver this calendar year, so it went change the numerator or denominator. The only thing that will impact will be dispositions or acquisitions, so we will address those as they come. If we sell properties that are 100% leased, obviously it will have an impact versus if we sell properties that are less than the 90% leased. The same thing with the acquisitions side.

Right. So just given that you have got PPG, that sounds like things are trending well and it's a low occupied building, you have done a lot of very good progress at Riverwood 100 and as you guys talked about with the quarter being the best quarter since 2007 in terms of expectations. Is this just conservatism on your part, only going up 50 basis points at the mid point and if you kind of -- is that more maybe what the expectations were towards the latter part of 2011? Given what appears to be some improving fundamentalists just being conservative or do you think that's kind of a real-time snapshot of what the expectations are for 2012?

Well, we try to provide forecasts that are as accurate to the best of our knowledge. I think to say that -- do we run the Company on the edge of the envelope or conservatively? I think it's more the latter than the former, but I wouldn't want you to take that comment and automatically add 2.5% points to what we say year end is. So just two quick reminders. One is we do have the AT&T move out in 2800 Century Center, which they were in 221,000 square feet, as you know. They moved out of approximately 70,000 square feet of that by the end of the year, which enabled us to backfill north of Grumman and Yancey into -- those build-outs are now underway. We'll still get 151,000 square feet, 152,000 square feet back from them at the end of June, so that will be -- that will clearly impact this year. We have some prospects for that, but it is a substantive hole to backfill, even though we have done about a third of it thus far.

Okay sure and last quick one for Terry if I could. The same store numbers, if I look sequentially from the third quarter to the fourth quarter, the revenues went down and I don't think the same store pool changed. I don't think you guys sold anything in the quarter and there was nothing held for sale. Is there a reason why those revenue numbers would go down sequentially?

Not anything too big, but there were a couple things, Brendan. Bad debt expense sequentially quarter was up a little bit which caused -- we run bad debts through revenues so that was part of the reasons you see that drop. When we did the year end CAM accruals this year for 2011, that were trued up in the fourth quarter and truing up the prior quarters, there was a little bit of tightening and a reduction there which contributed to that. Then some oddball things here and there, but those were the two primary things that you're seeing there.

Okay. Great. Thanks a lot, guys.

Hey Brendan.

Yes.

Just going back to Ed's comment on the balance sheet, just to be clear, the $0.08 to $0.12 dilution that we talked about to get us down to the pre-Pittsburgh leverage level, that will come from some combination of planned dispositions and/or equity. It's a combined number, not all equity. I just wanted to make sure that was clear.

So that's a combined number?

It's a combined effect from either selling non-core assets and/or issuing new common during 2012.

Okay. Alright. Maybe we can follow-up on that one-off line because.

Okay. Sure. No problem.

Thanks.

Our next question comes from the line of Caitlin Burrows of Credit Suisse. Please proceed with your question.

Hi. Good morning. We were just wondering what was the yield on your LifePoint build-to-suit and do you plan to do any additional build-to-suits in the future?

Our track record has been that we have delivered right at nine plus on cash for our build to suits for the last six or seven years. We're certainly on course with that with what we have announced in our guidance for this year on development is $50 million to $150 million -- yes, $50 million to $150 million, Caitlin.

Okay. Great. Thanks.

You're welcome.

Our next question comes from the line of Joshua Attie of Citigroup. Please proceed with your question.

Hi. Thank you I just had a question on the guidance. Could you just clarify how much dispositions and acquisitions and the equity issuance is included in the guidance, because I know you said $0.08 to $0.12 is a combination of equity and sales? So is that the -- is that -- does that include the entire $100 million to $150 million of sales?

Josh, this is probably isn't a fair analogy, but if you've ever driven a heavy piece of equipment that's track driven, you have one shifter for the left track and one shifter for the right track and you keep them going so you go in one direction. If you push harder on the left it turns left and vice versa. So we've got dispos in one hand and equity issuance in the other, and our goal is to get back to that 44%. So if we start having slippage on dispositions, we might hit the equity handle a little bit harder. You know, vice versa. The idea is to continue to call our portfolio by selling non-core assets. If we're more successful in that than we expect to be, we won't raise as much equity. So we will push hard on one and not the other. If we have trouble getting dispositions out the door, but we still want to get back to this commitment to our shareholders of being leverage neutral, we will push the other lever.

I see. Then are the acquisitions of $100 million to $300 million included in the FFO guidance or not?

They are not.

Okay. Thank you. That makes sense. On the dispositions, could you talk about the profile of what you might be selling in terms of either, how highly occupied it might be or what the disposition cap rate might be?

Well, I don't want to say too much about disposition cap rate because you will have these in the market. We don't want to find ourselves bidding against ourselves, because we know how widely distributed our transcript is. It will vary. What we want to do is, we don't want to sell muscle. So we're not going to sell what we consider core to the portfolio. If there are buildings that have specialized use that are in a non-core submarket within a market that have functional obsolescence, or have long-term CapEx issues, or bad plates, or it's under part, those types of things, that's what we want to call out. Those assets that can't differentiate themselves from the competition.

Just to give us a sense of what the run rate is after the deleveraging the $0.08 to $0.12 impact, is that spread throughout the year in your guidance or is the deleveraging front-end loaded?

Josh, this is Terry. It's a little bit front end loaded. So it's not exactly spread even. I would say it is front end to some extent. Not all in the first quarter, but a little bit more in the first half than second half.

Okay. If I could ask a separate question, in your prepared remarks you talked about selling a piece of land to do a multi-family joint venture and that being a better return longer-term than just selling land. How much more of that do you think that you could do? Is that a one-of transaction or is there more of that and how big a piece of the -- your invested capital could that eventually be?

Well, we own about a 590 acres of land in total. Of that, about 60 acres we consider to be non-core. I don't think that there is a lot of opportunity to sell the land for alternate purposes like this one is. A couple of years ago we did the same thing in an adjoining site, also in Weston, and we sold it before it ever stabilized and we doubled the return that we would have achieved had we just sold the land out right. So there's not a tremendous amount of opportunity to continue to convert the end use of the tract of land for what we will have left, which will be about 55 acres of non-core.

Okay. If I could ask you one more question. When you think about acquisitions, what's your appetite to expand within Florida outside of Tampa Westshore to some of the other south Florida markets?

Nominal.

Thank you very much.

Sure. Thanks, Josh. Hey Josh, I'll send you a D8. That's a Caterpillar.

Thank you.

Our next question comes from the line of John Guinee from Stifel. Please proceed with your question.

John, you there?

Yes. Can you hear us?

Can now.

Alright. Sorry about that. We were looking back over the last four or five years on your FFO and your FAD versus your dividend, and the essence of the business is it looks to us like you run about a $0.90 to $1.00 a share annual deduct to get from FFO to AFFO. Then you've got that you are paying about $1.70 dividend and one way or another my guess is, you need to get your AFFO or your CAD up to $2.00, $2.10 in order to feel you're in a position to increase the dividend. Is that in the cards either through FFO growth or TI and leasing commission reductions to get yourself in a position to raise the dividend any time in the next three or four years?

Boy, that's tough to tell. Certainly it's a goal of the Company to do that. I think within the next two years, I would suspect that our dividend would be constant at the $1.70 per annum that it is now. To make conjecture as to what it would be three to four years out is -- that's tough, but it's certainly a goal that we would want to achieve. I do think that we've been consistent with our dividend throughout this downturn. Most of our peers, since the fall of 2008, have either reduced or dramatically cut their dividend to some degree or another and we haven't had to do that. I think there needs to be some recognition of the fact that we have maintained it throughout this trough and I think our yield today is fairly attractive in comparison to our peers. I think steady for the next two, and then after that it's just tough to tell from sitting here today, in February.

I think, John, that the pendulum just hasn't quite swung back to point where, from a leasing CapEx stand point, that we're in a position that says that we can command as is deals or really low TI deals to garner new activity. So I think for the next couple years we're going to probably be in that same boat.

Got you. Thank you.

Thanks, John.

Our next question comes from the line of Michael Knott with Green Street Advisors. Please proceed with your question.

Hi guys, good morning. Terry, just wondering if you or Mike could just elaborate a little bit on the same property NOI growth expectation for 2012? At the mid point I think you were around 2%, a little less in terms of growth for next year. Basically you provided the guidance for occupancy, but what else its going on in there in terms of maybe operating expenses or rent bumps or rent roll ups or down that you're kind of thinking about?

A couple things. Michael. I did mention in my prepared remarks that we do see a fair amount of the same-store straight-line rent that we had this year, will start to burn off and turn into cash rent next year. That's going to be a big help. Another thing is the composition of the same-property pool changes a little bit next year, because we reset the pool for those assets that will be in for the entirety of the two years. Some of the buildings that will go into the pool next year are showing some growth. There are some, like the developments Independence Park comes in, I believe one or two others. I think there's four in total that change. There is some pickup from there as well. We do continue to work hard on our expenses. We've done a lot to hold down OpEx over the years. I think we will continue to see some benefit there and maybe some slight occupancy growth as well in the same-property portfolio.

I think the -- on operating expenses further comment there, Michael, we had great traction for the last two or three years as we brought on -- we've talked about the impact of our VP of Asset Management and the work that he's done. It's been very helpful to us and so a lot of that low hanging fruit has been taken out. Now we're really getting into the weeds it try to find opportunities, particularly in areas like energy management. We have made significant investment in our properties in the past we will continue to do so that will have great payback there. Things that are difficult for us to predict are, primarily our taxes. Those are lumpy and it just depends on the cycle when we get a reassessment or whatever. I think that it will be difficult to achieve the same level of operating expense benefits that we have in the past, but we never stop looking for those opportunities.

On rent roll downs, is it fair to expect kind of a mid single-digit kind of roll-down and if that's right, is that sort of representative of the entire portfolio at this point in terms of a mark-to-market?

That's fair. Yes. I think that's fair. I think we have talked about it in the past and it's been pretty widely discussed.

The only foot-note I'd put on that Michael, is I'm not sure it's fair for the entire portfolio because we are starting to be on the dawn of some deals that were done in tough times. So any deal that was signed late 2008, 2009, as they start to come to us, I think we won't see as much in the way of a downturn because some of those are really done under difficult situations.

Yes. It's the ones that were down in 2006, 2007, before things crashed that -- and remember we get those annual escalations that compound that come through and CAM expense pass-through. So those are the tough ones to overcome from a rent growth standpoint.

Right and just last question on that. What kind of rent bumps are you guys getting these days?

We traditionally see between 2% an 3%. We certainly do a fair number of deals at 3%. I think our average right now across-the-board is about 2.7%.

That's what's you're getting now or is that representative of what's in place across the entire portfolio, or is it about the same?

Yes. That's what's in place now. If you look at the portfolio and it's fairly consistent with what we're able to achieve in deals, but one of the fortunate things is we still have yet to see deals where you're not able to achieve rent bumps during the term.

I think our market, our division VPs, and our leasing folks have done a great job of kind of setting the standard for Highwoods when you come to us. That's just an expectation in the market that we're going to be requesting and getting that level.

It's fair to say that the brokers know that their commission is predicated upon contractual gross rents over the term, so the escalator is something that helps serve them a little bit, too.

Great. Thank you.

Thanks, Michael.

(Operator Instructions). Our next question comes from the line of Dave Rodgers with RBC Capital. Please proceed with your question.

Good morning guys. Ed, I can imagine you on the next development site, sitting on that track loader with one handle forward and one back, in the mud with a smile on your face.

I need to see it, Josh, the clip to the Gold Rush. If you have ever seen that TV show.

Following up on a comment you made that was specifically about asset sales and I think maybe parsing out, it seems like the capital markets are certainly more active on the very high-quality credit tenant side. You have done a couple of deals lately. You have got very good long-term assets like the RBC Plaza asset down in Raleigh. What keeps you from selling those besides, just maybe, the quality? Do you react to the capital markets at all where those are the easier assets to sell and look to maybe replace them later and sell the lower quality stuff at a better point in time? How do you balance what is core to Highwoods and what is just in a core market?

Yes. Two quick thoughts. One is that we're in no rush to get back to this 44% that I said before. We want to be sure we're patient and deliberate and that we do that in the right manner. To take something that we consider core, that long-term will be core, like the building you mentioned. In our view, although it may be biased, we think that that asset will always differentiate itself from what's in CBD today. That we will always have an opportunity to be to be in the deal flow, to lease that building and at attractive terms.

We wouldn't want to flip out of something that we think is muscle just in order to hit this 44%. We're going to get there one way or the other, but we want to be sure that we're patient and deliberate and disciplined about the way we go about that. Whether it be through dispositions or equity issuance. There's a concentration that we want to have so that we're in the deal flow if we flipped out of key assets, the more of those that you flip out of, the more you're taken out of the deal flow. Because the brokers in town don't know you to have the better assets that their customers will want to get a good look at and a quote from. We see ourselves more as strategic operators as opposed to the financial engineering of continuously buy, build, flip, buy, build, flip. We would have rather have a stable of the best assets in the better submarkets, so that we can routinely be in the deal flow for any deals that are out in the marketplace.

This question may have been asked and answered, and I apologize if I missed it. Do you see a big difference between the pricing, let's say on the bottom half of your core assets and the top half of your non-core assets?

Yes. Like a barbell. Yes. Very distinctive and not just for us but as we look at what others are achieving whether it on be on the right weight or the left weight, it's the delta in between is the Grand Canyon.

So selling that top portion of the non-core assets remains the best execution for Highwoods today?

Yes. What we're selling, though be we don't think that it's -- we -- in our mind we've called the -- grid out of the bottom of the barrel years ago. It's not like we're trying to sell 25 year-old flex space out of our portfolio today. We did a fair amount of that cleaning up already. We don't think that this is a total clean up job of getting rid of things that are stick-built and things that are flex space. For us it's just more constructive pruning as opposed to an overall portfolio clean up.

Okay. Thank you.

Sure. Thanks, Dave.

Our next question comes from the line of Brendan Maiorana from Wells Fargo. Please proceed with your question.

Thanks. I just wanted to follow up on the Tampa market. One, I think the last time that we talked about PWC moving out, it was unclear whether or not they were going to move out of the full 319,000 square feet. It sounds like from the prepared remarks, that they are in fact moving out of the full 319,000 square feet, is that correct?

That's -- when I ask my son questions like that he says maybe. We are in conversation with them. We're working with them on keeping maybe as much as 20% of the space.

20% of the space. So -- I mean maybe this is a hard question to answer then, but if I -- my understanding is they were going into a new building that was 250,000 square feet. Do you know if their headcount is staying the same and is 250,000 square feet, which would be call it a reduction of 20% relative to the 319,000 square feet. Is that emblematic of the efficiency gains that a lot of your tenants would see by moving from an older building to a newer building?

I would say that Price Waterhouse is exhibited to be more of a contractor of space than other users that we have seen. We have seen them do this in a number of markets not just in our product, but in others where they have taken on a philosophy that is dictating a change in the way that they layout and consume their space. Just as a side note, not necessarily speaking to PWC. What we hear from our customers where they get such mandates from corporate or the leaders of the partnership, where they're taking partners out of nice offices. It's certainly impacting their level of enjoyment of coming to work. To go from what has traditionally been a sizeable office into some cube farm or some open space. Our view of that is that we haven't seen that happen dramatically across-the-board, but we have seen PWC to be one of the entities that do that.

Just a reminder, Brendan, the PWC space that they'll be vacating at Tampa Bay Park, this is a very unique office for PWC, because it's a training operation where they bring in folks from all over the world to train them and they go back. They do a lot of outsourcing in India and other places, and these folks come in to Tampa to train. They have kind of created a template for this that was just easier for them to go into this new building and get them in there, versus trying to retenanting in our existing building. We made a great effort to try to keep them there, they love the building, but ultimately it just came down to them feeling like they needed to do this. The 60,000 square feet plus or minus that Ed's talking about, would be space that's not necessarily conducive to going over to that space. I think that's a good testament to Tampa Bay Park that they would consider staying there.

I would also keep in mind Brendan, that in our markets where rental rates are, let's just say between $20 an $30, this decision of contraction doesn't have near the impact on the bottom line that if they were to do it in mid-town New York where rental rates are $120. There is a very different decision to be made here and the analogy that I often use is, that back in 1974 we had a gas crisis and everybody was in line, everybody was saying they're going to get out of their F-150s and their Broncos and get into Hondas. If you walked out of our office right now and looked out the window, there are plenty Tahoes, Suburbans, F-150s, Silverados still in the parking lot. Even though the gas has gone from $0.53 to $3.40.

Yes. I know that --

To change from a 16 foot by 18 foot office, down to a cube, does it really garner enough where it would drive somebody to do that in our markets?

Yes. Understood. I appreciate the color. Just a couple more if I could follow up on this asset and the Tampa market. One, where do you think that your rents are in place relative to where market rents are? Is that, I think as you were talking with Michael Knott, maybe that kind of down [five to ten], is that reasonable for this market? Then, two, how do you think you compare relative to the competitive set? Are there larger tenants that are seeking space in the Tampa market and are there large blocks that are available in the market or a significant amount in the Westshore market?

That's clearly one of the market advantages that we have is that we will very have a large block of space that a lot of competition in the new development can't offer any more.

By our count, Brendan, in the Westshore submarket there was only one block of, let's call it 40,000 square feet of contiguous space, of Class A space, in that whole submarket. It's a fairly large submarket, so clearly us having this large amount of space in LakePointe One and Two in Tampa Bay Park is -- it's a silver lining to what we have, because there are some larger users out there. Obviously we talked about the Time Warner transaction and that was a competition between multiple markets. Atlanta, Tampa and Tampa won out and by the sheer fact that we had that inventory available and were able to work with PWC to release any kind of encumbrances they had on that space. We hope that Time Warner will be a large growth company for us there in that building.

Okay. Great. Lastly, I mean, TIs should we assume kind of a typical like $20, $25 or something like that nothing out of the ordinary?

Yes. I think it depends between the two buildings that they occupy. The LakePointe Two is the newer building, it has a little newer template. Probably can expect a little less TI to retrofit that, than LakePointe One which is more of the early 1990's aura about it. We clearly will have that as part of our play-book to go in and start working on that space when they come to vacate.

Brendan, just to put that in context. Their occupancy in the two buildings is roughly the same, right about 160,000 square feet. The common areas of LakePointe Two are in great shape. So we'll only do some aesthetic things and modernize the elevators in LakePointe One.

Okay. Great. Okay. Great. Thanks for the color, guys.

Thank you.

There are no further questions at this time. I will turn the conference back to you.

Thank you everyone. Appreciate your interest and time and listening in, as always. If you have any follow-up questions, please don't hesitate to give us a call. Thank you.

Ladies and gentlemen, that does conclude the conference call for today. We thank you very much for joining and ask that you please disconnect your line.